The study of risk pricing in Indian financial markets by applying garch-M model

The core function of well developed financial markets is to facilitate smooth and efficient allocation of resources from savers to the ultimate users. The Indian financial markets have undergone reforms post the 1990s. However, an area that has not received adequate attention is the pricing of risks in theses financial markets. Various benefits emanating from the functioning of the financial markets depends critically upon resilience of various segments of the markets to withstand shocks and the strength of the risk management systems in place. In view of critical role played by the financial markets in financing the growing needs of various sectors of the economy, it is important that we study the risk pricing of various markets in India. The main objective of this article is to analyse risk pricing as reflected in the movement of various interest rates, exchange rates. We apply the GARCH-in-Mean model of Engle, Lilien and Robins (1987) consistent with the standard risk-return trade-off hypothesis and the asymmetric news and leverage effects to various segments of Indian financial markets to analyze the risks associated with these markets. The results indicate the ability of these markets to price risks.